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Airlines Win the Day but Face Future Challenges Northwest v. Ginsberg

May 2014

A recent Supreme Court decision reminded airline industry participants that the preemption provision of the Airline Deregulation Act of 1978 (ADA) is alive and well. In Northwest, Inc. v. Ginsberg, the Court held that the Airline Deregulation Act preempts a state-law claim for breach of the implied covenant of good faith and fair dealing if the claim seeks to enlarge the contractual obligation that the parties voluntarily adopted. While the ruling was well-received by the airlines, carriers should take note of several unanswered questions that could leave the door open to future legal wrangling.

The Facts

The facts of the case involve Rabbi S. Binyomin Ginsberg, a Platinum Elite member of Northwest Airlines' WorldPerks frequent flier program.1 Ginsberg contacted Northwest 24 times between December 3, 2007 and June 2008, asking for compensation for various reasons such as late arriving luggage. After awarding Ginsberg almost $2,000 in travel credits, $500 in cash, and nearly 79,000 program miles, Northwest terminated Ginsberg's membership in the WorldPerks program, citing a provision in the WorldPerks agreement that allowed Northwest to cancel a member's account due to abuse.

Ginsberg sued Northwest, claiming that his membership was terminated in an attempt to cut costs when Delta merged with Northwest in 2008. While he filed claims for breach of contract, negligent and intentional misrepresentation, and for violation of the implied covenant of good faith and fair dealing, the District Court dismissed all claims. Ginsberg only appealed the claim alleging violation of the duty of good faith and fair dealing.

State Common Law and ADA Preemption

The Airline Deregulation Act of 1978 put an end to federal regulation of airline rates, routes, and services, and also preempted the states from undoing deregulation through their own lawmaking. The ADA's preemption provision, codified at 49 U.S.C.§41713(b)(1), states: “A state, political subdivision of a State, or political authority of at least two states may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation under this subpart.”

The Court grappled with the ADA preemption provision in three respects. First, the Court was asked to determine whether state common law constitutes a “provision having the force and effect of law” as used in§41713. If it does, then it would be preempted under the ADA. Looking to legislative history and the language of the ADA when first enacted, the Court had little difficulty concluding that the ADA preemption provision was meant to cover state common law rules. It also noted that excluding common law claims would run counter to the purpose of the ADA, because if they were excluded, then states could regulate the industry in a way that undoes federal airline deregulation.

Airline Frequent Flier Programs: Rates, Routes, or Services?

The Court next addressed whether an airline's frequent flier programs relate to airline “rates, routes, or services,” and answered the question in the affirmative. As a result, the ADA's preemption provisions were applicable to Ginsberg's claim. The Court said that the frequent flier program at issue was connected to an airline's “rates” because members can earn miles that can be used to secure tickets or seat upgrades, which effectively reduce or eliminate the price of a ticket or upgrade. Further, a frequent flier program is also connected to “services,” because miles earned through the program can be used to gain “access to flights and to higher service categories.”

ADA Preemption of Implied Covenants of Good Faith and Fair Dealing

Generally speaking, the ADA does not categorically preempt breach of contract claims. Ginsberg asserted that Northwest breached a covenant that was implied in his frequent flier contract with the airline. However, this case involved the question of whether the ADA preempted not a contract itself, but a covenant of good faith and fair dealing surrounding the contract that was implied under state common law. The final issue, according to the Court, was “whether . . . [the] implied covenant claim is based on a state-imposed obligation or simply one that the parties voluntarily undertook.” If the implied covenant of good faith and fair dealing was a state-imposed obligation, then it would be preempted under the ADA. If it merely affirmed the parties' agreement, then ADA preemption would not preclude the claim.

The Court rested its holding on an analysis of state law, noting that under Minnesota law, which controlled the terms of the contract, the covenant was state-imposed. To reach its conclusion, the Court pointed to the fact that Minnesota does not allow parties to contract around or out of the covenant, thus the covenant mandatorily applies to every contract. As a result, breach of the covenant was not part of the parties' original bargain, but was a state-imposed requirement, based on state policy. The claim was therefore preempted under the ADA.

Despite Northwest's urging, the Court refused to hold that all claims of breach of an implied covenant, no matter the law of the jurisdiction governing the contract, are preempted by the ADA, even though Northwest argued that without blanket preemption, airlines would have to contend with “a baffling patchwork of rules.” In dismissing Northwest's arguments, the Court reminded Northwest that airlines could disclaim any implied covenants in states that allowed disclaimer, and in states that did not, the claim would be preempted. Despite the Court's ruling, frequent fliers are not without recourse, either—the Court pointed out that the U.S. Department of Transportation offers protection through its authority to prohibit unfair and deceptive practices in the airline industry and also to investigate complaints that are specific to frequent flier programs.

What the Airlines Need to Know Going Forward

This case has several implications for airline frequent flier programs that airlines should be aware of to ensure they protect against potential legal liability.

First, airlines should review their current frequent flier contracts and consider amending or strengthening those agreements to address vulnerabilities exposed in the Ginsberg decision. To preclude lawsuits based on breach of an implied covenant of good faith and fair dealing, airlines can take two approaches. Under one approach, airlines could choose Minnesota law—or a state with comparable law in the area of implied covenants—to govern its frequent flier contracts. As long as the implied covenant is state-imposed and parties cannot contract out of the covenant, any claim for breach of the covenant will be preempted, per Ginsberg. Under the second approach, airlines could choose to have a frequent flier contract governed by the law of a state whose rules do not mandatorily impose an implied covenant and that allow parties to contract around such rules. If that is the case, airlines may still head off lawsuits for breach of the implied covenant as long as the airline specifies that the frequent flier agreement does not incorporate the covenant.

Second, airlines should be wary of the possibility that courts could rule in future cases that frequent flier programs are not “prices, routes, or services” under the ADA due to their changing nature. In his brief to the Court, Ginsberg touched on this possibility when he argued that frequent flier programs today may not truly relate to the price, route, or service of an air carrier as they have in the past because members can now earn miles without using an airline's services, and can use those miles for items and experiences that are unrelated to the airline.

The Court noted Ginsberg's argument and suggested that while the change in frequent flier program structure could have an impact on a future case, the changed nature of frequent flier programs was not at issue in this case and did not factor into the Court's decision. This is because Ginsberg earned his miles specifically from the flights he took, and redeemed miles for flights, upgrades, and other airline services. Still, the Court's analysis leaves open the question of whether the decision would be different for a frequent flier program member who sues an airline after being dropped from a frequent flier program, but does not earn or redeem miles on any service related to the airline.